Friday May 14, 2004 - 09:56:57 GMT
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INVESTICA Ltd - www.investica.co.uk
Inflation figures crucial for dollar
Daily Market analysis 14/05/04
Key factors today:
The inflation developments will remain the principal market focus with the US consumer price data very important. Industrial production and and consumer confidence figures will also be closely watched.
The market focus will remain on US inflation and interest rates in the short term. In this context, US consumer inflation figures will be very important. A core headline increase of 0.4% or more would trigger further dollar buying interest. A dollar break of 1.1760 could trigger a rapid move towards 1.1650, but the net risks still suggest that long dollar positions are dangerous stronger than the 1.18 level.
The dollar resisted a further test of support around 1.1920 and the US currency has held a stronger tone over the past 24 hours. The dollar strengthened to a high of 1.1775 and, although the Euro has regained the 1.18 level, the Euro is struggling to hold support. The dollar is gaining further support from technical trends and the expectations of higher US rates which is leading to a further reduction in long high-yield positions in global markets.
The US economic data was firm with the larger than expected headline producer price data capturing the main attention. Producer prices rose 0.7% for April, primarily due to higher energy prices while the underlying increase was a more moderate 0.2%. Retail sales fell 0.5% for April, but the March increase was revised up to 2.0% and the annual increase was very strong at 8.0%. Jobless claims rose to 331,000 in the latest week from 319,000 the previous week, but this is also still consistent with a strengthening labour market.
The consumer inflation figures today will be important and a headline increase of 0.4% or above would increase market expectations of higher US interest rates. Conversely, a figure of 0.3% or lower would be likely to trigger a dollar correction weaker. The risks are probably for a higher than expected figure, but this may now be priced in to the dollar's value.
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